After yesterday's fall, the European currency has a slim chance of rising today. Today, markets await the European Central Bank meeting at which the regulator may introduce the penultimate increase in its unprecedented campaign to raise interest rates.
Economists widely expect the deposit rate to be raised by a quarter of a point to 3.5%. However, a lot will depend on forecasts of how much further officials are willing to increase the cost of borrowing given the current inflation, which is three times higher than the target of 2%.
Let me remind you that inflation unexpectedly worsened last month, but the core indicator, excluding the costs of food and energy, reached a four-month low of 5.3%. Meanwhile, many European officials, including Christine Lagarde, think that inflation has not reached its peak yet.
Analysts and investors believe that this was the last rate increase this month, which will lead to a tightening of monetary policy by 425 basis points since July last year. However, it is hard to predict what will happen next month. Markets would like to get some hints during today's press conference of ECB President Christine Lagarde. Obviously, an increase at the September meeting cannot be ruled out, especially if updated quarterly forecasts show that inflation remains high.
Today, ECB President Christine Lagarde will likely repeat that future steps depend on price forecasts, core inflation, and how the economy is digesting the regulator's past decisions to increase borrowing costs. This statement will come right after the unexpected rate hikes in Canada and Australia and after the Federal Reserve refrained from raising rates after 10 consecutive increases. Borrowing conditions have significantly tightened recently, and the demand for loans has sharply dropped. These developments have a very negative impact on the economy and its growth rates. The latest data on retail sales in the eurozone did not bring any optimism either.
Any hints from Christine Lagarde that the economy may be significantly affected by current actions or is already experiencing some problems due to this, will seriously weaken the position of the European currency, which can continue its correction against the US dollar. As for the technical outlook for EUR/USD, buyers need to protect 1.0780 and take control of 1.0820 to maintain their position.
This will allow the pair to rise to 1.0865. From this level, the price can climb to 1.0910, but this will be a rather challenging task without the hawkish policy of the European Central Bank. In case of a decrease in the trading instrument, I expect large buyers to step in only at around 1.0780. If nothing happens at this level, it would be wise to wait for a retest of the low of 1.0730 or to open long positions at 1.0700.
However, it's worth noting that not all ECB policymakers support the hawkish stance. There are those on the Governing Council who adhere to a more dovish scenario: Pablo Hernandez de Cos from Spain and Yannis Stournaras from Greece recently stated that they expect the ECB's aggressive policy to end soon. France's well-known bank official Francois Villeroy de Galhau also follows a similar scenario.
More hawkish officials, such as Gabriel Makhlouf from Ireland and Klaas Knot from the Netherlands, say they expect new changes in September. Bundesbank President Joachim Nagel and Austrian representative Robert Holzmann hinted that they would also prefer to take another step.
Thus, Lagarde's hints about possible tightenings will require her to go beyond her usual phrasing, which will give markets the necessary food for thought.
As for other changes in ECB policy, the bank is expected to stop reinvestment under the old ECB quantitative easing program.
